Why New Microsoft CEO Satya Nadella Must Save Windows 8

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Newly named Microsoft (NASDAQ: MSFT  ) CEO Satya Nadella faces a lot of challenges, but the biggest may be getting customers to adopt the Windows 8 operating system.

According to NetMarketShare, which tracks operating system usage, Microsoft closed 2013 with 90.7% of the desktop/laptop OS market – handily leading Apple's (NASDAQ: AAPL  ) 7.5%. But adoption of the latest Windows has been much slower than it was for Windows 7. Of course, Windows 7 followed the largely disliked Vista, which likely sped adoption, but as the chart below shows, Windows 7 reached 10% market share in 10 months. Windows 8, which was a major redesign of the OS, took 15 months to reach that milestone.

What is Windows 8?

Windows 8 changed Microsoft's traditional operating system to one that more closely resembled Apple's iOS, which powers the iPhone and iPad, and Google's (NASDAQ: GOOGL  ) Android, which is also for mobile devices. Windows 8 dropped the look and feel that had been in place since Windows XP was released in 2001 and replaced it with an icon-based interface.

Windows 8 does have an alternate start screen that looks more like traditional Windows, but the mainstay start button was entirely removed in the initial release. That button was sort of restored in October's Windows 8.1 update, but the new version only brought users to the new graphic interface, not the old file menu.

And though it was not entirely pushed that way at launch, Windows 8 represented Microsoft's attempt to have the same operating system across desktop, laptop, and mobile (including tablets and phones) platforms).

What is it worth to Microsoft?

Windows is no longer the main revenue driver for Microsoft. The Office division is the most profitable for the company and the Server/Tools division brought in more revenue (but made less money), according to the company's 2013 financial reports, which showed an overall $26 billion profit. But while the numbers may not be as big as they once were, the Windows division still brought in over $19 billion in 2013, producing a profit of over $9 billion. Office may have done better at over $16 billion in profit on nearly $25 billion in revenue. Entertainment makes a small profit and Online Services lost money.

However, since Office and Servers/Tools are Windows-based, if Microsoft does not keep customers in the Windows universe, sales will fall correspondingly in the other divisions.

Why has it not worked?

Whereas Apple has always been an innovator and real tech geeks may experiment with alternate operating systems like Linux, Windows has always been the steady player used in the business world. Microsoft may have innovated under the hood, but the company slowly evolved its interface, keeping things familiar for the millions that used the system for work purposes. There were, of course, changes from Windows XP to Windows Vista to Windows 7, but those alterations were subtle -- not massive overhauls to the system.

And though the perceived botched launch of Windows 8 likely forced former-CEO Steve Ballmer from his job, the much-criticized executive should be lauded for seeing the need for change. Microsoft may dominate the OS market for traditional PCs, but traditional PCS are rapidly fading in popularity.

According to research firm Gartner, worldwide PC shipments totaled 82.6 million units in the fourth quarter of 2013, a 6.9% decline from the fourth quarter of 2012. This is the seventh consecutive quarter of shipment decline. More importantly, while PC sales shrink, tablet sales continue to grow.

"Although PC shipments continued to decline in the worldwide market in the fourth quarter, we increasingly believe markets, such as the U.S., have bottomed out as the adjustment to the installed base slows," said Mikako Kitagawa, principal analyst at Gartner. "Strong growth in tablets continued to negatively impact PC growth in emerging markets. In emerging markets, the first connected device for consumers is most likely a smartphone, and their first computing device is a tablet. As a result, the adoption of PCs in emerging markets will be slower as consumers skip PCs for tablets."

So, while Ballmer might not have handled the Windows 8 launch perfectly, had he not developed the product and simply stuck to slowly evolving Windows, Microsoft would be left without an answer for the exploding mobile and tablet markets.

Can it work?

Microsoft has around $84 billion in cash and marketable securities, so the company can afford to play a long game. Windows 8 numbers have been creeping up (albeit slowly) for PCs and the Surface tablet jumped from .4% market share in the United States and Canada in December 2012 to 2.3% in December 2013. Windows 8 Phone, which had been steadily climbing, dipped from 3.3% market share in September 2013 to 3.1%, according to Comscore, which is a troubling development for Nadella.

Still, with PC sales dismal but stabilizing, Nadella has the money and time to attempt to convince his customer base – still 90.7% of the PC market – to stay in the family. If he can do that, while building mobile share with Surface and putting Windows 8 phones back on a growth path, the new CEO cand be perceived as a success whereas the same results from Ballmer would likely have been perceived as a failure.

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Read/Post Comments (11) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On February 05, 2014, at 4:51 PM, NoWindows8LockIn wrote:

    Windows 8 is filled with too many vendor lock-in gimmicks.

    Microsoft is making the same mistake that many Fortune 500 companies made when faced with similar situation - panic and try to replace true innovation with gimmicks.

    This stunt works in the short term due to market momentum - the customer still buys your product, even while they are kicking and screaming. But eventually, it catches up with you, and NO COMPANY EVER RECOVERS ONCE IT DOES.

  • Report this Comment On February 05, 2014, at 5:47 PM, mrkeegan wrote:

    Microsoft Window 8 is NOT very user friendly…Been a PC person for years, just bought a MAC and love it...

  • Report this Comment On February 05, 2014, at 8:18 PM, Hulgar1 wrote:

    I'm IT support for a small grades chool and have struggled with Win 8. The problem isn't just the interface, it is that many older programs do not run well on it. We are now "downgrading" to Win 7 on new boxes, and this has even given us incentive to look into other OS's ... Google is really making it attractive for schools to migrate to the browser based linux OS and make use of their cloud services.

    50% of our last 2 years of hardware purchases have been on non MS boxes. Our users are happy with these, if not even liking them better than MS. Definitely faster, and no issues with spyware as on MS. Not one in 2 years.

    For a company with complicated/expensive programs developed back on XP, not being able to run those programs is a disaster. I also have had issues trying to run virtual machines in Win 8. This is one reason the corp. world is going to hold off .... many are just now migrating to Win 7 as they got the old programs patched to run on it .... why start over with Win 8 ? It is a waste of money plus potential problems for the users.

    The start menu is easy to fix for free using aftermarket products, which makes it even more frustrating to people that find this out after struggling with Win 8 .... they wonder why MS can't just roll out the same thing as the after market companies did so quickly ? Win 8 is ok, and more secure than previous versions, but it can be problematic and frankly why go through that effort if you don't need to. This is why I think the uptake has been so slow. 7 was a good OS and that will be the problem till they stop supporting it as they have XP.

  • Report this Comment On February 05, 2014, at 8:27 PM, awilldo wrote:

    Save Windows 8? Why would you be interested in Windows 8 if you know that Windows 9 will be coming out.

  • Report this Comment On February 06, 2014, at 9:03 AM, auggybendoggy wrote:

    Hated Windows 8 until I used it. Now I'm totally satisfied with short boot times and no BSOD's. Love the touch interface on my conterible and now my desktop.

  • Report this Comment On February 06, 2014, at 9:29 AM, taloft wrote:

    Windows 8 is just win 7 with the new Metro GUI slapped on top to make it more usable with touch devices and apps. My biggest gripe, 8.1, is they ditched the win 7 recovery backup option that allowed you to make a complete disk image.

  • Report this Comment On February 06, 2014, at 11:51 AM, uncoveror wrote:

    NO! He should re-release Windows 7 giving "downgrade" rights to all poor suckers saddled with 8, along with all the Mea Culpas he can muster. Windows 8 is the worst thing that ever happened to computing, and is making the PC an endangered species.

  • Report this Comment On February 06, 2014, at 12:04 PM, Carling wrote:

    When the Great Man himself spends hours trying to install W8.1 then that's really does say a lot about Windows 8.1

    Here is a report from newyorker com

    Bill Gates’s first day at work in the newly created role of technology adviser got off to a rocky start yesterday as the Microsoft founder struggled for hours to install the Windows 8.1 upgrade.

    The installation hit a snag early on, sources said, when Mr. Gates repeatedly received an error message informing him that his PC ran into a problem that it could not handle and needed to restart.

  • Report this Comment On February 06, 2014, at 3:48 PM, bigalnc wrote:

    If we'd wanted a Mac, we might have bought one.

  • Report this Comment On February 06, 2014, at 6:34 PM, rossbro wrote:

    Windows 8 SUCKS. !!! Ya just about have to be an engineer to operate the crap. I had Vista and was happy with it. The people who ' designed ' this bullcrap need a good asskickin'. No wonder Microsoft is having problems.

  • Report this Comment On February 07, 2014, at 12:03 PM, wgcross2 wrote:

    Oh come on. Windows 8 is a bust. MS needs to man-up and move on. MS moved on after ME and Vista and needs to do the same again. Coke blew it with the New Coke and quickly back-tracked and recovered. If MS is going to insist on the touch screen, the metro interface and mainly supporting apps, they will have to have two operating systems. It's that simple. Businesses/Corporations are not embracing the touch screen, require keyboards and run programs (not apps). We do not do social media nor surf the internet at work. Email is strickly for business purposes. Ballmer steered MS in the wrong direction. It's my understanding that MS is looking at Windows 9 next year. That alone, will cause a wait-and-see position. Ballmer was stubborn with Vista, but Windows 8 is just getting ridiculous. If there are people who are happy with Win 8.x, fine, but there are so many who are not. Can MS afford to lose so many people and much of the business community?

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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